Iran, Venezuela and North Korea are all potential flashpoints in 2018

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The risk landscape in 2018 is being pulled in two competing directions: on one hand, global economic growth has been revised upwards for the best outlook since the global financial crisis. On the other, geopolitical competition is at its punchiest since the end of the Cold War, with material (if still modest) threats of both trade wars and real wars. This dynamic, explored in our RiskMap 2018 forecast, has been bullish for oil prices since mid-2017, but 2018 is far from a one-way bet.

In terms of sheer physical fundamentals, the most obvious factor continues to be the predictable response by US shale drillers (and their bankers) to rising prices. Shale drilling activity continues to neatly lag global price movements by about four months, and the rise in prices is a fillip to cash flows bathed in red ink since 2015. A relatively large slice of production is also favourably hedged. As a result, most observers anticipate bumper US supply growth in 2018, verging on 1m barrels a day, offsetting most of the rise in demand and putting a ceiling on prices.

It gets more interesting on the geopolitical side. Opec's return to supply management since late 2016 has been a moderate success, stabilising and setting markets on the road to rebalancing. Production cuts have been agreed with Russia and other non-Opec countries through 2018, with Venezuela's spiralling output supplying headroom for less compliant participants like Kazakhstan. There's not yet an exit strategy, but also no urgent concern about a supply crunch.

This energy status quo faces a series of geopolitical questions in 2018.

First: what will happen with the Iran nuclear deal? The US by mid-May must continue to waive a raft of sanctions to implement its commitments under the Joint Comprehensive Plan of Action (JCPOA), aka the Iran nuclear deal. However, US president Donald Trump said in January—as part of a broader policy to contain and counter Iran—that he would no longer issue the waivers unless European parties agreed to make substantive changes to the deal. Since the Europeans (and Russia, China, and Iran) have declined to re-open the JCPOA, it's unclear if and what other efforts might satisfy US demands.

Three months is scant time to negotiate an international agreement. However, the Europeans are keen to preserve the JCPOA (as is much of the US Congress), and the opening round of talks with the US in late January on a 'side agreement' was promising. If no deal is reached, however, a unilateral US snapback of financial restrictions on Iranian oil exports could embargo a decent chunk of global supply and escalate regional conflict risks.

Second: how long will Russia continue to cooperate with Opec? The supply cuts help mask Russia's technical difficulty sustaining production levels (under US and EU sanctions) and rising prices are helping fill depleted state coffers. However, like other Opec members, Russia is wary of losing market share to US shale and other competitors. The supply cuts are also crimping plans for domestic consolidation and international expansion of its oil industry. In November 2017, Russia was one of the loudest voices calling for a clear off-ramp from the supply agreement.

Third: how long can Venezuela keep going? Suffice to say, the economic situation remains grim. The financial, administrative, and technical deterioration of Petroleos de Venezuela (PdV) is very likely to manifest as a further steep decline in production and revenues. More urgently, PdV, since late 2017, has missed bond payments as the government pursues a broader sovereign debt restructuring with increasingly sceptical bondholders. A hard default by PdV could prompt asset seizures abroad that accelerate the collapse of Venezuelan production and exports.

Finally: Will war break out with North Korea? Pyongyang's nuclear and missile capabilities approached putative US 'red lines' in 2017, and future tests may surmount them entirely. The US is avowedly planning for different conflict contingencies, while taking pains to highlight their risks and its preference for diplomacy. This 'maximum pressure' strategy has materially increased the threat of war, as well as the space for accident and miscalculation.

The geopolitical landscape in 2018 is a powder keg. The energy industry needs to pay close attention to those playing with fire.